Economists have a poor record in their economic forecasts. Most are invariably optimistic, perhaps because they are paid by investment firms, and it behooves them to be perpetually hopeful. Also, too few are students of history, and consequently, are not familiar with previous business cycles.
All that an objective observer can do now is to marshal all the facts, and then let the case rest, dependent on the preponderance of evidence.
Previously, economic contractions followed bouts of inflation, which triggered the central banks (the Federal Reserve System in the United States, and the Bank of Canada here) to raise interest rates. This time, however, was not a period of high interest rates. Rather, the time of plentiful credit and low interest charges entailed all kinds of excesses.
Several years ago, easy credit resulted in a bubble in the stock market, and more recently, wild speculation in real estate. People were purchasing homes whose upkeep they could ill afford, in the expectation that house prices would continue to escalate. Mortgages were offered to house purchasers who clearly did not qualify for them, so-called "ninja mortgages," that is, no interest or very low interest rates for a few years – sub-prime, no jobs for the applicants, with no assets. So it is no surprise, then, that when house prices stalled and went into reverse, those home buyers had mortgages that exceeded the value of the houses themselves. Buyers had made no down payments, so they merely walked away from the houses.
Currently, there are hundreds of billions of dollars of sub-prime mortgages outstanding. Financial institutions of all stripes "invested" in them, and the ensuing defaults affected big banks and financial institutions.
Too, the time the biggest speculators in sub-prime mortgages were two agencies of the U.S. government. Their holdings have been estimated at $2-trillion.
Optimists argue that the U.S. government can fill any void by cutting rates even further. The last rate cuts were ignored by financial markets, which realized that this “remedy” will not work. It will lead to a much lower dollar as it is being debased by easy money, actually printed to provide the funds needed. Also, central banks have poured in more than $500-trillion into financial markets, all to no avail. However, this weakened U.S. currency will deter foreigners from providing the funds required to pay for the U.S. foreign trade deficits.
Besides all that, the United States is running huge budget deficits, some $400-billion annually, so it cannot hand out money to prime the pump and bolster the economy. As a last resort, the Federal Reserve has bought a private company, Bear Stearns, to prevent its bankruptcy, an outrageous use of taxpayers’ money.
Given this bleak litany, it seems inevitable that North America will be trapped into a significant economic contraction. The only question is how prolonged it will be.